The Numbers Behind Social Security's Impending Insolvency

Last week National Taxpayers Union Foundation compared the candidates’ plans for Social Security and showed where the plans came up short. Reforms to Social Security and other entitlement programs are an absolute must if Americans expect a fiscally responsible government. Before suggestions can be made on how to change Social Security, an explanation on the magnitude of the problem must be the first step.

According to the White House’s Office of Management and Budget's actual number for Fiscal Year 2015, the federal government collected $3.3 trillion in revenues and spent $3.7 trillion. Of that amount, the Social Security Administration (SSA) reports that $897.1 billion -- nearly 25 percent of all spending – was for Social Security. Without reform, Social Security is projected to continue to grow as a share of the federal budget and will face severe funding shortfalls.

Unlike discretionary spending programs such as defense or education, total funding levels for Social Security, Medicaid, and other entitlement programs are not set through annual appropriations. They are essentially set on autopilot and will continue to grow as the number of people eligible for benefits increase. According to the Congressional Budget Office (CBO), spending for Social Security as a percentage of Gross Domestic Product has remained steady at 4.1% since 1966. The CBO has projected that this percentage will balloon to 5.9% in 2026 and 6.3% in 2046. Moreover, without substantial reforms, Social Security along with major health care programs such as Medicare and Medicaid will consume nearly 50% of all federal spending by 2046.

The vast majority of Social Security is funded by Federal Insurance Contribution Act (FICA) taxes, or payroll taxes, that equals 12.4% of an employee's salary. In theory, the employee pays 6.2% and the employer matches that amount, but research shows that the employer’s share represents money that would otherwise have been part of the employee’s salary. Essentially, the employee pays the full 12.4% payroll tax.

Social Security is divided into two parts, the Old-Age and Survivor Insurance (OASI) and the Disability Insurance (DI), which are predominantly, but not exclusively, funded by FICA taxes. In 2015, 49.2 million people received OASI benefits that totaled $742.9 billion while 10.8 million people received DI benefits that totaled $143.4 billion.

According to the most recent Social Security Trustees Report, unless immediate action is taken to improve the prospects of the program, the OASI Trust Fund and the DI Trust Fund will be exhausted in 2035 and 2023, respectively. Even if the law was changed to combined the trust funds into an Old-Age, Survivor, and Disability Insurance (OASDI) Trust Fund, the financial prospects of that trust fund would only last till 2034 before becoming exhausted.

Thus, a combined OASDI Trust Fund will only be able to provide 100% of scheduled benefits through 2033. Once the trust fund is depleted, Social Security would be able to pay beneficiaries only 79% of their scheduled benefits. Additionally, SSA measures the long-term financial status of the OASDI Trust Fund by examining the program’s ability to provide its obligated benefits to current and future beneficiaries over the next 75 years, or until 2090. SSA estimates Social Security’s unfunded obligations for the next 75 years to be $11.4 trillion. Over an infinite horizon, Social Security’s unfunded liabilities total is a staggering $32.1 trillion -- $6.3 trillion more than last year’s projection.

Social Security has accumulated these massive and burdensome unfunded obligations largely due to Social Security’s OASI and DI that have expanded beyond their original intents. The Social Security program was initially designed to serve as a safety net for low-income and elderly individuals in the event of catastrophic disasters, like an economic recession, workplace disability, or death of a family’s breadwinner. It was not intended to function as a retirement plan or income replacement plan that all Americans qualify for regardless of their income.

Moreover, another reason for the impending shortfall is the changing demographics in American society. Since Social Security functions as a pay-as-you-go system with current workers paying for current beneficiaries, the structure of Social Security is not sustainable as beneficiaries grow at a faster rate than workers entering the market. According to American Enterprise Institute’s Andrew Biggs, the ratio of workers to beneficiaries in 1950 was 16:1. In other words, there were 16 workers paying FICA taxes for one beneficiary. Today that ratio has diminished to less than 3:1 highlighting the inability of Social Security to function without placing tremendous burdens on taxpayers, especially Millennials. The only question is whether the changes will take place because a passive Congress allows automatic, nondiscriminatory benefit cuts to take place or will change happen because a proactive Congress and White House realizes the gravity of the issue and reforms the program to set it on a sustainable path.

Taxpayers should seek Social Security policies that stabilize benefits for low-income and elderly workers who need the benefits the most and allow individuals the option to keep a larger portion of their paycheck to invest in individual retirement plans, which tend to produce a greater rate of return than Social Security’s investments. These steps will help stabilize Social Security and ensure a more secure retirement for all taxpayers.